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Surety vs. Insurance (4 Important Differences)

By December 16, 2020March 25th, 2021Business Insurance, Surety Bond
Surety vs. Insurance

(This article was written by a guest author, Neven Beyer. Nevin is the President of Keystone Bonding and has worked in the surety industry for the last 12 years.)

Have you ever been asked to produce a surety bond before bidding on a job?

Maybe you have a paving company and wanted to bid on a parking lot project for your borough or township. Maybe you were bidding on a bigger job – like re-paving your city’s streets.

Maybe you’re a contractor who was trying to get a job for a big box store updating their HVAC system. Or maybe you were trying to get a job putting up a new building for a national grocery chain. 

If you wanted to bid on any of these jobs, you needed surety!

Big contractors and small contractors alike need surety when bidding on a job for a local, state, or federal government entity. It is also needed when bidding a job for large private entities like big box stores, banks, or hospitals.  

If you are like a lot of contractors I do business with, you probably have some misconceptions about surety bonds. Understandable because this product can be a little tricky to understand.

For the past eight years, I have worked for Keystone Bonding, an entity of Keystone Insurance Group. Our company works alongside insurance agencies like Baily Insurance to provide surety for their clients. 

The biggest misconception I run across is the idea that surety is just a form of insurance. That couldn’t be farther from the truth!

To help you understand the differences between surety and insurance, I’ve outlined these four main differences:

  1. Surety guarantees performance. Insurance covers damage.
  2. Surety is between three parties. Insurance is only between two parties.
  3. Surety is only available to qualified parties. Insurance is available to everyone.
  4. Surety benefits the job owner. Insurance benefits the policyholder.

But before we jump into those differences, let me explain to you in simple terms what surety is. 

What is surety?

Surety is a type of bond guaranteeing that contracted work will be done on time by someone capable of doing the work. It’s like saying timely and quality completion of the project is a “sure thing.” 

To make these guarantees, surety companies sell three types of bonds: bid bonds, performance bonds, and payment bonds.

Bid Bonds

A bid bond guarantees that you are qualified to do the job if your bid is selected. Once your bid is selected and you begin the job, the bond transfers into a performance bond.

Performance Bond

A performance bond guarantees you are going to do the job, do it right, and do it on time.

A performance bond will protect the owner of the job if for some reason you are not able to complete a job properly by the date you agreed to have it done.

Payment Bond

A payment bond guarantees that all of the subcontractors you hire to help with a job and all of the suppliers you purchase materials from will get paid.

This guarantees that the owner of the job will not be stuck paying for supplies or work that you were supposed to pay for.

Surety Bonds vs. Insurance

One huge misconception that many people have is that surety functions like a type of insurance. 

That is not true! 

Here are the four ways that surety differs from insurance.

1. Surety guarantees performance. Insurance covers damages.

Surety guarantees performance. It ensures that your company will get the job done – or else the surety bond company will step in and make sure the job gets done if you aren’t able. 

For instance, if you are working on a municipal building and some of your essential equipment becomes damaged preventing you from finishing the job. A surety bond guarantees that no matter the circumstance the job will get finished and get finished on time.

Insurance covers damages. Insurance pays out money when damage has occurred on a worksite, during or after work has been done. 

For instance, insurance will pay for damage that results from an electrical fire. It will cover the replacement of damaged property and loss of income related to the fire.

2. A surety bond is a contract between three parties. Insurance is an agreement between two parties.

A surety bond always involves three parties: the contractor, the owner of the project, and the surety company. Essentially, the contractor purchases a bond from a surety company who then makes a guarantee to the owner of the project. 

The surety company guarantees that the contractor is qualified to do the job, will complete the job, and will finish the job by a certain date.

Insurance, on the other hand, involves only two parties: the insurance company and the insured. With insurance, the insured pays a certain amount to the insurance company for an insurance policy. That policy outlines what the insurance company will cover. The insured agrees to those terms before buying the policy. 

3. Only qualified parties can purchase surety. Anyone can purchase insurance. 

To purchase a surety bond, the individual or company must be qualified to purchase this product. Similar to applying for a bank loan, the individual or company must have good credit, good financials, and good character.

The surety company will complete criminal and bankruptcy background checks before selling you or your company a bond. They will check to see if you complete your work on time. They will look at your credit history. They will also look for any lawsuits against you or your company. 

With insurance, the customer calls their agent and describes what kind of policy or coverage they want to purchase. The agent prices out various policies, and the customer decides which they would like to purchase. 

Your credit history does affect your insurance rates but does not prevent you from purchasing an insurance policy. Poor credit may result in higher premiums, but will not exclude you from buying coverage.

4. Surety benefits the job owner. Insurance benefits the customer who buys it.

One major difference between surety and insurance is who benefits from this product. The contractor who purchases receives no benefit from purchasing surety. It is actually an expense to the contractor that they will never see a return on. 

And if the contractor is unable to complete a job on time or properly, the surety company will step in and finish the work. This scenario has incredibly negative impacts for the contractor.

If you, as the contractor, can not complete the job as agreed upon and the surety company does it for you, you will have to pay the surety company. 

Before selling you a surety bond, you are required to sign an indemnity agreement declaring that the surety company has the right to seize your belongings to cover the cost of completing the job on your behalf. They can auction off your equipment to regain their loss.  

Surety is an added expense for the purchaser. And if the purchaser “defaults” on the bond, the surety company will seize your assets to pay for their loss.

Insurance, on the other hand, benefits the policyholder. When you purchase an insurance policy, you are being guaranteed protection if something unfortunate happens.  

How can we help you with surety?

Now that you have a better understanding of surety, you may be wondering what are the next steps to obtaining surety for your business. 

Through your agent, Keystone Bonding can assist you with all kinds of bonding needs – not just for construction-related contracts. Our company also bonds suppliers, manufacturers, trucking, and other types of businesses.  And one of our specialties is working with smaller commercial businesses.

Because Baily Insurance is part of the Keystone Insurance Group, they have access to many tools and resources that add value to their clients. Surety is just one of those things.

If you find yourself needing a surety bond, you can call any of the commercial agents at Baily Insurance. Their agents will guide you through the process while also helping you with any insurance needs you might have for your business. 

If you found this article to be helpful, you might want to take some time to check out these related articles:

5 Most Overlooked Insurance Coverages for Contractors

5 Steps to Creating an Effective Commercial Insurance Program